WASHINGTON — President Joe Biden is proposing trillions in new taxes, crafting a precise hike that would affect the wealthiest investors but not the kind of educated upper middle-class suburban voters who abandoned the Republican Party and helped push Democrats to recent victories.
Biden’s plans include raising the corporate tax rate to 28 percent, changing how corporate earnings are taxed at home and abroad to boost revenue, requiring heirs to multimillion-dollar fortunes to pay taxes on inherited stocks, and nearly doubling the capital gains tax, but only for high earners, by treating it like regular income. Plus, he wants to boost IRS funding to increase audits of the same groups.
Just as notable are those his taxes leave out. Upper middle-class, even elite, professionals who earn their income through salaries are largely untouched. As Biden put it in his speech: “We’re going to reward work, not just wealth.”
These taxpayers showed a willingness to support Democrats in 2018 and 2020 as the party made major gains with college educated voters in metro areas, who also served as a powerful source of donors.
“President Biden is really protecting the coastal professional class that helped elect him,” said Brian Riedl, a former aide to Sen. Rob Portman, R-Ohio, and now a senior fellow at the Manhattan Institute. “Those in the $200,000 to $400,000 range are going to come out ahead as winners in the redistribution from millionaires.”
Biden has pledged not to raise taxes on incomes below $400,000, which is an increase from that of former President Barack Obama, who set a $250,000 threshold for raising taxes. Even Biden's call to raise the top marginal income tax rate to 39.6 percent (where it stood in 2017) is modest compared to other proposals.
Biden's capital gains tax increase would only take effect for people who make more than $1 million per year in total income. Many households with six-figure incomes could even see a tax cut from expanded child care deductions in the Covid-19 bill that Biden wants to make permanent.
According to an analysis by the left-leaning Institute on Taxation and Economic Policy, the higher income and capital gains taxes would reach less than 1 percent of taxpayers overall and no more than 1.2 percent of residents in any individual state.
The Biden tax plan reflects the prevailing progressive view on how inequality is driven: The ultra-rich are invested in the stock market, which rises faster than workers' salaries, the profits made off the market are subject to lower taxes than the rate on wages, and many of those gains are never taxed at all because their children inherit their stocks and the prices reset.
From 1978 to 2018, the top 0.1 percent of Americans went from holding 7 percent of the nation’s wealth to 18 percent, according to research by the University of California, Berkeley, economists Gabriel Zucman and Emmanuel Saez. At the same time, the median American’s wealth still hasn’t recovered from the Great Recession, and wages took years to bounce back.
“Because of the dramatic increase in income and wealth concentration, there is substantial tax revenue that can be collected just by increasing taxes on the 1 percent,” Zucman told NBC News.
Republican critics argue Democrats are hiding the true costs of higher taxes.
Some percentage of corporate taxes are passed down to labor in the form of reduced wages and benefits — the nonpartisan Tax Policy Center pegs labor’s share at 20 percent, and other estimates are higher — and taxes on investments could drive down 401(k) values or discourage new startups if they go too far.
In the official Republican response to Biden's joint address to Congress on Wednesday, Sen. Tim Scott of South Carolina decried the plans as “the biggest job-killing tax hikes in a generation.”
Celinda Lake, a Democratic pollster, said framing new taxes on the rich and business as making them pay their “fair share,” a phrase Biden used in his speech, appeals especially well with voters.
She noted that progressive political groups ran advertising to counter Republican attacks that Biden would raise taxes, typically by highlighting his $400,000 pledge
“We tested this,” Lake said. “The upscale professionals in the suburbs are less concerned that their taxes will go up than blue-collar people are. They worry about who will pay for it.”
Democrats also benefit from the relative unpopularity of the Trump tax cuts, whose benefits were concentrated toward the top. While the 2017 Republican law cut taxes for all income groups on average, most Americans didn’t notice a difference in their returns, giving Democrats a chance to pitch their plan as a corrective.
Democrats are not in complete agreement, however, about taxes that affect households in some high-cost areas like the Northeast.
Lawmakers are divided on whether to bring back a deduction for state and local taxes, known as SALT, that was capped by the 2017 tax law. The White House, backed by progressives like Rep. Alexandria Ocasio-Cortez, D-N.Y., is so far refusing requests to eliminate the SALT cap.
Democratic supporters of keeping the cap say its removal would only help the rich, while those who want it limited argue it affects upper middle class taxpayers in expensive housing markets and hurts their local budgets. Only 9 percent of taxpayers would benefit from the change, per one estimate, but that includes the doctors, lawyers and computer engineers in blue metro areas Biden has so far spared.